Canadian Business Contracts Handbook. Nishan Swais
to our example: If your factory burns down and all your stock with it, including the forklift that the buyer had ordered, then circumstances would have frustrated the ability of the contract to be carried out. It is impossible to deliver a forklift that no longer exists, regardless of what a contract may require.
It should be noted that a contract ends at the time of frustration. From that point forward, the parties are released from further performing the contract. That said, any rights or obligations that have accrued prior to the event of frustration would still be binding on the parties.
For instance, if a contract became frustrated after it had been partially performed (e.g., a caterer delivers the cake to your wedding but is unable to deliver the cupcakes because the oven suddenly broke down), the party who contracted with the caterer would still have to pay for the cake but not for the cupcakes.
4.4 Unconscionability
Unconscionability generally arises in situations of unequal bargaining power and results in one party being unfairly prejudiced by another. If performance of a contract would be unconscionable, then a court might invalidate it (or a term of it) on that basis.
Consumer contracts which reflect a “take it or leave it” approach to business are sometimes invalidated — or certain terms are invalidated — on the basis of being unconscionable. For example, consider the elderly Ms. Johnson who does not own a computer but suddenly finds she unwittingly signed up for unlimited Internet access. As it happens, she only contacted her cable company to purchase phone service but wound up being talked into purchasing a phone and Internet package together. In those circumstances, a court would likely decide that it would be unconscionable to enforce the contract against Johnson or at least that portion that related to the Internet services.
The test that a court would apply in determining unconscionability is whether it would be reasonable to enforce the contract in light of standard commercial practices and considering what parties bargaining freely on equal terms might have done.
It is rare that businesses (as opposed to private consumers such as Johnson) will be able to successfully have a contract invalidated on the basis of unconscionability. The courts are not in the business of regulating markets. Moreover, inequality of bargaining power is a fact of business life. In the end, a court will not substitute its business judgment for yours. You should, therefore, always ensure that if you are faced with a “take it or leave it” option, you simply leave it when it makes sense to do so.
5. Summary
We have examined performance, privity, and breach — the components of every contractual relationship — and considered the circumstances in which a court might invalidate a contract or a contractual term. We are now in a position to answer the question: What does a contract do?
5.1 Establishes your rights and obligations
The first thing a contract does is establish your rights and obligations, as well as those of the other parties to the contract. Those rights and obligations make up the terms of the contract.
It is important, therefore, to ensure that every contract to which you are a party accurately and completely reflects your business intention in its terms. If you want the right to assert that you must be paid within 30 days of each invoice you deliver, then you should be sure that right is spelled out in your contract. By the same token, if you do not want to be obligated to do something (e.g., deliver the forklift you just sold), you should be sure that the contractual terms do not oblige you to do so.
5.2 Allocates risk
By defining your rights and obligations, a contract allocates risk among the contracting parties. If the parties do not meet those obligations, they risk the legal consequences of non-performance.
Returning to our example, we saw how you bear the legal risk of providing a forklift to a buyer, at a certain time, for a certain price. The buyer bears the risk of paying the purchase price of the forklift.
If you also state that the forklift has a certain load capacity, then you have further been allocated the risk of ensuring that statement is true. If you simply say nothing about the load capacity, the risk lies with the buyer that it cannot lift anything heavier than a paper clip.
5.3 Provides a legal basis for compensation
By breaching a contract (i.e., not performing one or more of your obligations under it), you set the stage for a lawsuit being brought against you by the injured party. The practical effect is to create a situation where a court can order you to pay damages.
A contract, therefore, provides the basis for compensation to any party that can successfully claim breach of a term of the contract. As discussed, that compensation is designed to put the injured party in the same position it would have been had the breach not occurred.
With that, we are now in a position to supplement what we learned in Chapter 1 and expand on our original definition of a contract.
We can now say that a contract is a legally binding agreement that establishes the respective rights and obligations of the persons contracting, allocates risk among them, and provides a legal basis for compensation (in the event of a breach). That definition captures both what a contract is and what it does.
All that remains to be done in this introduction to writing your own business contracts is to examine what a contract looks like.
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